Sales and Purchases

Objective A: Recording Sales and Purchases

Sales and purchases are the most fundamental transactions in any trading business. Understanding how to record them correctly in the general ledger is essential for preparing accurate financial statements.

Credit Sales

When a business sells goods on credit, two accounts are affected:

• Debit Trade Receivables (asset increases — the customer owes money)
• Credit Revenue/Sales (income increases)

The goods have been delivered but payment has not yet been received. The trade receivable will be settled when the customer pays.

Cash Sales

When a business sells goods for immediate cash payment:

• Debit Cash/Bank (asset increases)
• Credit Revenue/Sales (income increases)

Credit Purchases

When a business buys goods on credit from a supplier:

• Debit Purchases (expense increases — for trading goods)
• Credit Trade Payables (liability increases — the business owes the supplier)

Cash Purchases

When a business buys goods for immediate cash payment:

• Debit Purchases (expense increases)
• Credit Cash/Bank (asset decreases)

Note: The Purchases account is used for goods bought for resale (trading inventory). Goods bought for use in the business (e.g., office equipment) are recorded in the relevant asset account, not in Purchases.

Objective B: Sales Returns and Purchase Returns

Sales returns (also called returns inwards) occur when a customer returns goods to the business — perhaps because they are defective, damaged, or not as described. The business issues a credit note to the customer.

The journal entry for a sales return is:

• Debit Sales Returns (or Returns Inwards) — this reduces net revenue
• Credit Trade Receivables — the customer owes less

Purchase returns (also called returns outwards) occur when the business returns goods to a supplier. The supplier issues a credit note to the business.

The journal entry for a purchase return is:

• Debit Trade Payables — the business owes less
• Credit Purchase Returns (or Returns Outwards) — this reduces net purchases

Returns are recorded in separate accounts (rather than directly reducing sales or purchases) so that management can monitor the level of returns — a high returns rate may indicate quality problems or customer dissatisfaction.

Objective C & D: Sales Tax (VAT)

Sales tax (such as VAT — Value Added Tax) is a tax on consumer spending collected by businesses on behalf of the government. The business acts as a collection agent — it charges sales tax to customers and pays sales tax to suppliers, then remits the net amount to the tax authority.

Key principles:

• Sales tax charged to customers is output tax — it is NOT revenue for the business. It is a liability owed to the tax authority.
• Sales tax paid to suppliers is input tax — it is NOT an expense for the business. It is a receivable from the tax authority (it reduces the amount of output tax the business must remit).
• The net amount payable to the tax authority = Output tax − Input tax.

Recording Sales Tax

When a business sells goods for £1,000 plus 20% VAT (£200):

• Debit Trade Receivables £1,200 (the total amount the customer owes)
• Credit Revenue £1,000 (the sales value excluding tax)
• Credit Sales Tax (VAT) £200 (the tax liability)

When a business purchases goods for £600 plus 20% VAT (£120):

• Debit Purchases £600 (the purchase value excluding tax)
• Debit Sales Tax (VAT) £120 (the input tax — reduces the liability)
• Credit Trade Payables £720 (the total amount owed to the supplier)

Objective E & F: Discounts

There are two types of discounts that businesses deal with: trade discounts and settlement discounts (also called cash discounts).

Trade Discounts

A trade discount is a reduction in the list price offered to certain customers (e.g., bulk buyers, trade customers). Trade discounts are deducted before the transaction is recorded. The invoice shows only the net amount after the discount.

For example, if the list price is £10,000 and a 20% trade discount is offered, the invoice shows £8,000. The journal entry records the sale at £8,000 — the £10,000 list price and £2,000 discount are never recorded in the accounts.

Settlement Discounts (Cash Discounts)

A settlement discount is a reduction offered to encourage early payment (e.g., '2% discount if paid within 10 days'). Under IFRS 15, revenue is measured at the amount the entity expects to receive. If a settlement discount is expected to be taken, revenue is recorded at the discounted amount.

For example, if goods are sold for £5,000 with a 2% settlement discount expected to be taken:

• Revenue = £5,000 × 98% = £4,900
• Dr Trade Receivables £4,900 | Cr Revenue £4,900

If the customer does NOT take the discount and pays the full £5,000, the additional £100 is recognised as revenue at that point.

Discounts Received

When the business receives a discount from a supplier for early payment, it is recorded as discounts received — a credit entry that reduces the cost of purchases (or is shown as other income).